The Buddy-to-buddy Regulatory System

Banks and their regulators have always enjoyed a cozy relationship. Regulators are notorious for going slow in clamping down hard on practices that might be unsafe and unsound. Cease and desist orders, a weapon available to all the regulators, are used sparingly and usually only in the most egregious cases. The hundreds of billions of dollars of deposit insurance and taxpayer money lost in the savings and loan debacle of the 1980s stand as a monument to regulatory laxness and delay.

One of the prime reasons for this buddy-to-buddy regulatory system is the fact that both the financial institutions and the regulators find it comfortable and mutually beneficial. Under the disjointed federal financial regulatory system each niche of banking has its own separate regulator, and when regulators appear before Congressional Committees they are always protective of their own group of institutions.

The Office of the Comptroller of the Currency (OCC) has a particular concern about keeping its flock of national banks in a happy mood. OCC derives all its operating funds from assessments on national banks under its jurisdiction. When a large national bank decides to switch to a state charter, it can leave a gaping hole in the budget of the Comptroller. So it is not surprising to see the Comptroller vigorously protect his flock of national banks through lawsuits preempting the application of state and local consumer protection laws to national banks. The unspoken and quite effective message is clear-“stick with the national charter and thumb your nose at state consumer laws.”

Now other federal financial regulators are finding some new ways to stroke the institutions under their jurisdiction. This time, the Community Reinvestment Act—so important in moving credit into low and moderate income and minority neighborhoods—is endangered by a new effort to mollify banks and thrift institutions.

The Office of Thrift Supervision (OTS) kicked off the new war on CRA by proposing a regulation which would limit full examinations of CRA performance to only those thrift institutions with assets of $1 billion or more. Institutions below that threshold would only be subject to limited “streamlined” and “simplified exams.”

It is not surprising that OTS is anxious to keep its own constituency happy. For several years, plans have been floated to eliminate the agency and let its functions be absorbed by the Office of the Comptroller of the Currency. In addition, some institutions have abandoned their thrift charters to convert to bank charters. So, OTS figures that easier CRA exams just might keep their wandering institutions home.

OTSís new easy CRA exam rule takes effect on October 1. And surprise of surprises, the other financial agencies are now eyeing the same thought of easing the burdens for their member institutions. No one wants to be left out when it is time to pass out new gifts to the banks.

The Federal Deposit Insurance Corporation (FDIC), which examines state banks, has issued a proposed rule similar to the handiwork of OTS. The rule is now out for comment. The Comptroller of the Currency, Jerry Hawke, already under fire for his scorched earth attacks on consumer protections, is urging his fellow regulators to adopt a uniform streamlined CRA exam rule, undoubtedly thinking that he would have protection behind a solid regulatory front. But the reports coming out of OCC suggest that on substance, OCC will be in agreement on CRA-light exams for all institutions of less than $1 billion in assets. Earlier, the Federal Reserve was behind a move to a $500 million threshold for full exams, but the Fed seems certain to join the others at the billion dollar mark.

The adoption of weaker CRA exam rules will signal to the banking industry a de-emphasis of efforts to push bank credit into low and moderate income and minority communities. It will mean a sharp reduction in data and analysis needed to judge how well financial institutions are helping to meet the credit needs of all areas of their communities.

Much of the effective enforcement of CRA as a prod to push banks to serve all their communities comes to the fore when banks file merger applications. Community activists have been effective in pointing to data generated in CRA examinations to challenge the proposed mergers. In many cases, the protests constructed from the data have led to significant concessions that have assured critically needed credit for many communities. Even when the regulatory agencies want to make an informed decision on the community lending of the merging banks, the cupboard will be bare under the CRA-light approach to examinations.

The proposals for bare bones exams are on top of an already absurd rating system applied for CRA performance by each institution. Almost all the financial institutions – 98 percent – receive either a “satisfactory” or an “outstanding” rating for their performance as community lenders. Nothing is so rare as a regulator applying a “need to improve” or a substantial non-compliance rating to a bank. If there were any validity to the ratings and credit was actually flowing at a “satisfactory” level to all neighborhoods, our inner cities would, indeed, be shining cities on the hill. The conditions don’t match the glowing CRA ratings awarded by the regulators.

Until OTS leaped out with its billion-dollar rule, the only banks that were eligible for limited streamlined CRA examinations were small institutions under $250 million. But, the billion dollar threshold lets the vast majority of the nation’s commercial banks off the hook.

There are 7,691 commercial banks nationwide —only 428 with more than $1 billion in assets. If the OTS-generated rule becomes standard, this means that 7,263 banks will be on the regulators’ CRA-light list.

CRA has been a valuable economic tool for people who have few tools with which to build their communities. CRA has generated at least $1.75 trillion in credit to inner city and depressed rural areas since its adoption in 1977. It should not be weakened by regulators shamelessly attempting to please their banker-constituency. People need to speak to their members of Congress about this matter.

Ralph Nader is the author of: The Good Fight : Declare Your Independence and Close the Democracy Gap(Harper Collins Books). http://www.ralphnadersgoodfight.com/